CCP CCP Financial Statement Analysis & Credit Decisions 2

Question 1

In Altman's Z-Score model, a score below 1.81 for a manufacturing firm typically signals:

Accepted Answer

High probability of financial distress or bankruptcy within two years

Answer

Altman's original model places scores below 1.81 in the distress zone, indicating a high probability of bankruptcy within two years based on the five weighted financial ratios.

Question 2

A credit analyst is comparing two buyers with identical revenue but different capital structures. Buyer A uses heavy debt financing while Buyer B is mostly equity-financed. How does this affect credit risk?

Accepted Answer

Buyer A has higher credit risk due to mandatory interest and principal obligations

Answer

Heavy debt loads create fixed interest and principal obligations that must be serviced regardless of business performance, increasing the risk of default on all obligations including trade payables.

Question 3

Which financial statement adjustment is most important when evaluating a buyer's creditworthiness using operating lease-heavy financials under older GAAP (pre-ASC 842)?

Accepted Answer

Capitalize operating leases to reflect true debt-like obligations on the balance sheet

Answer

Before ASC 842 required on-balance-sheet treatment, analysts would capitalize operating leases (typically 8× annual rent) to get a truer picture of a company's total obligations and leverage.

Question 4

A credit professional calculates a buyer's interest coverage ratio at 1.2×. What does this indicate?

Accepted Answer

The buyer has very thin coverage, with operating income barely exceeding interest charges

Answer

An interest coverage ratio of 1.2× means operating income is only 20% above interest expense — leaving almost no buffer before the company cannot service its debt.

Question 5

When a buyer's balance sheet shows a significant amount of 'related party receivables,' a credit professional should:

Accepted Answer

Discount or exclude them from liquidity analysis as they may not be collectible at arm's length

Answer

Related party receivables may not be collectible on normal terms and often represent inter-company balances or owner transactions that won't generate real cash in a stress scenario.

(CCP) Certified Credit Professional Practice Test

(CCP) Certified Credit Professional Practice Test

CCP CCP Financial Statement Analysis & Credit Decisions 2